Dealing with investors on the board

Feb 29, 2008, 12.20 AM IST

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Some tips to help you make the most of your board when your investors become directors. Advisors are not directors, and directors are not advisors. As an entrepreneur, if you���re looking for an advisor, get a consultant. Don���t rely on your board to give you advice. Their job is to hold you accountable for goals that drive your business��� success. Most entrepreneurs like the idea of recruiting an advisory board. Often, it provides instant credibility. For first-time entrepreneurs, it also gives them confidence that smart people believe in their business concept and are willing to lend their reputations to help the company grow. In reality, it takes a lot of work to make advisory boards give advice that���s helpful to your company.

Give your initial directors a term limit

During the founding stage of your business, some attorneys will encourage you to expand your board to include more people than just the founders. If you���re like most entrepreneurs, you may be tempted to ask your closest advisors to join your board even if they aren���t investors in the enterprise. This isn���t a horrible idea, despite the guidance provided above about keeping advisors and directors separate.

However, if you do invite advisors to join your board, be sure to set a term limit. This is simply a matter of setting expectations through an e-mail or letter. Also, ensure that your attorney has drafted your bylaws and financing documents with the appropriate governance rules giving stockholders and founders the ability to change the composition of the board.

You very likely will want the ability to change directors as you get close to a round of financing. Even if you don���t plan to seek future financing, you may find that the advisor-director is no longer very helpful after a few months, and it will be much easier to have the conversation about parting ways if it���s associated with a pre-planned end of term.

Ensure Directors are well-equipped

A large part of a director���s job in a start-up is to sign legal paperwork. If you plan to raise money from angel investors without changing the make-up of your board, then your directors will need to approve option plans, capitalisation tables and stock charters, and various corporate resolutions. Avoid directors who are inexperienced and too cautious. It is good to have at least one process-oriented director, who likes to follow the rules of good governance. It will instill good habits at your company, which in the long run will save you legal bills and avoid administrative costs.

Investment is the key

When you invite an investor to join your board, the dynamic of board meetings is likely to change from an advisory, problem-solving environment to a performance, accountability-driven environment. However, this only happens when you invite larger investors with more at stake. Angel investors, who have contributed $25,000, tend to behave more like advisors even if they���re on the board.

Learn to become a chairperson

One of the hardest lessons for entrepreneurs is to learn to balance the roles of a CEO and chairperson of the board. Since you spend 99% of your time serving as CEO and chief bottle-washer in your enterprise, the ability to act like a board chair for a few hours every quarter is not easy. To do the job well, you have to remember that most directors who attend board meetings aren���t thinking about your business between meetings, so you need to remind them of the corporate objectives regularly and take full ownership. During the start-up stage, the essential administrative roles of a board chair are to run the meetings, set the agendas and oversee the fiduciary responsibilities of the board. One way to get some insight is to attend board meetings as a guest at other companies ��� or by joining a non-profit or charitable board.